Anyone involved in contract management needs to learn the basics first. At its simplest, contract management is about tracking performance and addressing any issues throughout the duration of the contract. A Report from the Journal of Contract Management found that 71% of companies misplaced 10% of their contracts. In 2015, the International Association for Contract and Commercial Management (IACCM) suggested that new technology could spark a contract management revolution, but only if businesses are ready to fully embrace the new tech's potential.
In this article, we'll discuss some of the risk management and cost-saving benefits of effective contract management. We'll also cover the essential services contract management software systems should provide to streamline contract management operations in your organization.
Contract management refers to reviews, analyses, and other measures that help keep contracts on track throughout the contract lifecycle. Many people may first think of contract drafting, negotiation, and signing as the critical phases of contract management, but this is only the beginning. Because contracts set the terms for a future agreement between the signing parties, it’s important to conduct periodic reviews to make sure all terms are being honored. General counsel may be particularly concerned with examining the legal boundaries of the contract and catching potential breaches or liabilities. They may also need to update a contract during the term if new compliance regulations must be included. Other contract managers and administrators may use contract reviews to assess the business’ spending or other matters.
The 2015 IACCM Benchmarking Study reported that one in three contracts are completed without negotiation of any amendment. The study also indicated that monitoring compliance remains a main focus for contract management. Improving the contract tracking and review system in an organization plays a significant role in minimizing compliance risks and helping leaders prepare for stronger negotiation at renewal.
Contract management is an essential part of minimizing risk and controlling waste of resources in the event of a merger or company acquisition. A report on Fortune 500 companies found serious contract management oversights that could damage large organizations. Acquiring a startup whose contracts contain unlimited liability clauses, auto-renewing six-figure contracts, or simply lacking the tools and resources to review hundreds of thousands of contracts that came with a merger present major legal and financial risks.
Ideally, an effective contract management system organizes contracts, stores them safely, and optimizes reporting and analysis. People tasked with managing contracts need to be able not only to locate files quickly, but understand how a contract is serving the organization, and identify strategies to help the organization operate more effectively.
What Is Contract Management Software?
Contract management software solutions are designed to facilitate the organization, compliance, and reporting needed to keep thousands of contracts operating smoothly. Plans come in various levels of complexity. It’s up to you to decide whether a simple, user-friendly option or a plan with a longer list of features best fits the needs of your business. Generally, some of the most important features an effective contract management software plan should offer include:
- Secure storage system with the capacity to easily store all of your contracts (and ideally many more, so that the system is able to grow with your business). Cloud-based storage systems on secured servers are common.
- Electronic signing or similar tools to make the negotiation and signing process quick and easy. A report from the Aberdeen Group stated, “Electronic contract records drive standardization and automation opportunities that drastically cut the cycle time of creation processes.”
- Security measures to keep sensitive documents in the right hands. These features may include user authentication, digital watermarks, administrative capability to limit user access, and more.
- Automated reminders and report generation. Rather than tracking renewal dates and creating reports manually, users should be able to utilize automated alerts as reminders of approaching milestones. The Aberdeen Group report found that organizations operating at Best-in-Class standards reported that 85% of purchases were compliant with contracts, compared to 30% in other organizations. This contributed toward an average yearly savings of 12.8% for Best-in-Class companies, compared to 5.6% for others.
- Advanced and/or customizable search options to make locating and comparing documents simple. Contract management should help leadership identify potential bottlenecks or other issues from a high-level perspective. Ideally, these insights will be available early enough for leadership to make the tactical decisions needed to prevent problems, rather than have to fix them when they’ve already occurred. If your system lacks the visibility or nimbleness to complete these assessments, you may want to look for other options.
Contract Lifecycle Stages to Manage with a Contract Management Plan
A common mistake in contract management is leaving contracts untouched for too long. A missed deadline or unnoticed issue can quickly rack up costs for the company. Some reports indicate that organizations lose 9.2% of annual revenue to unsatisfactory contracts. Other sources warn that looking at lost revenue, without considering lost profits as well, doesn’t capture the true impact of bad contracts on a company. A contract management plan can help administrators stay on top of:
- Contract communications, revisions, and updates. A shared interface eliminates the need to fax or email drafts back and forth. By reviewing the audit log, admins can see which users have viewed or edited a document. Electronic signatures are a legally binding option that can save time and add convenience. Considering that companies typically need a week or more to prepare and send an NDA, shortening the time between initial negotiation and contract signing can have a big impact on an organization’s efficiency.
- Intermediate audits and milestones. Reviewing contracts regularly throughout their term keeps you on top of deadlines, performance markers, potential discount or rebate options, and more. These reviews are a chance to correct problems at an early stage and to collect any eligible rewards for high performance.
- Contract renewal and renegotiation. Preparing in advance of a contract renewal period is a sound strategy to save money for the company. Taking advantage of an opportunity to renegotiate, instead of missing a deadline and finding yourself locked in an auto-renewal agreement, is a critical way to pursue more favorable terms. If ending a contract is the best option, initiating that process in a timely fashion saves money and hassle.